EUR 850.00 For Business Accounts Only

Morningstar | COLI Maintaining Growth Through Operational Efficiency and Acquisitions

We expect the slowing Chinese economy to weigh on the real estate sector, with slowing contract sales and inventory buildup constraining price growth. Commodity housing prices are likely to remain flat or decline slightly across the country. The drop in contract sales will reduce an important funding source for real estate developers, while smaller and unlisted companies will face increasing liquidity constraints, prompting them to raise cash by cutting prices or selling projects. We expect China Overseas Land & Investment to fare well in this consolidation-heavy environment, becoming one of the few developers to successfully maintain growth by focusing on operational efficiency and opportunistic acquisitions. COLI achieved a 19% revenue compound annual growth rate and a 15% core profit CAGR during the past five years. Management has met or exceeded contracted sales targets during the period. The company's streamlined development process has steadily shortened the time from land acquisition to presale to less than a year, resulting in an average land bank turnover rate of 4.5 years versus a peer average of 7-10 years. The quick asset turnover reflects the company's conservative approach to land acquisitions. In contrast, many developers' land banks are littered with so-called "dead land plots." Such land plots were acquired under overly optimistic market projections and are no longer financially feasible to develop. With a small asset base and robust presale proceeds, the company has maintained below-35% gearing during the past five years. The strong balance sheet provides the necessary dry powder for opportunistic acquisitions. In 2015, the company acquired Citic's property portfolio, allowing it to maintain its growth momentum in contract sales and revenue in the near term. And contract sales reached HKD 290 billion in 2018. We believe acquisitions are an attractive growth channel, as COLI can apply its refined development methodology to projects that have been managed less rigorously.